A guide to the Fidelity China Special Situations Trust

Please note, the interview for this article took place on 27 October 27 2025 and all views are as of this date

Having been battered, bruised and beleaguered in the previous three years, the Chinese government’s policy pivot in September 2024 marked a significant shift towards supporting growth, marked by stimulus measures like interest rate cuts and liquidity injections to counter economic slowdowns and deflationary pressures. 

The hope was the announcement would set the floor for a long-term recovery, with previous attempts to address these challenges running out of steam.

This time, the hope and confidence of investors has been rewarded, with the MSCI China index up almost 35% in the past 12 months alone*. There is also a growing focus on domestic consumption, high tech manufacturing, artificial intelligence and automation. The MSCI China is now on a forward P/E of 13.8x, with the adjustment bringing it towards its historical average.

However, if you scratch beneath the surface you can still see plenty of opportunities across the market-cap spectrum. For example, much of the performance in Chinese large-caps has come from the leading tech stocks, while other areas are still offering attractive valuations. This is also the case among mid and small-caps.

“There is still a wide spectrum of opportunities. Some areas continue to lag, despite the move towards a 14x multiple for the index. Areas like property and consumption still look very cheap – the big staples have hardly moved at all in terms of valuation – so they are among the areas that stand out to me in terms of value.”

That’s the view of Fidelity China Special Situations (FCSS) manager Dale Nicholls, who took over as lead manager of this trust in 2011. Dale makes use of the extensive research team at Fidelity to build an equities portfolio that invests across the entire range of companies in China, including some unlisted opportunities. This gives him exposure to both domestic leaders and a growing range of international businesses in a portfolio of around 180 holdings.

FCSS has returned 194.5% to investors in the past decade from a share price perspective, comfortably ahead of its peers in the IT China/Greater China sector (168.8%); while the NAV of the trust has also risen 175.6% (vs. 150.3% for the sector)**. It should be noted that the MSCI China index has risen 100.5% over this same period***.

Investment Process

Dale focuses on identifying and analysing companies rather than economies. He believes that the best investments are in those companies that have good long-term prospects: cash-generative business that are controlled by a strong management team. He looks for stocks with these characteristics but, crucially, which are underestimated by the market and are therefore undervalued. He will invest in any size of company were this mispricing appears but tends to have a bias towards small and medium-sized companies. This segment is generally less well researched by the market and is where Fidelity’s large investment team presence in the region can result in greater potential opportunities.

Dale believes the growth of the middle class and a refocusing on China’s economy towards domestic consumption are two key drivers of its economy and the stock market in the coming years; he therefore focuses on those products and services that cater for this growth within China.

Why now for this portfolio

• Excellent long-term performance, beating peers on both a share price and NAV perspective over 10 years.
• Trust remains on an attractive discount (-9.8%), compared with its five-year average (-7.6%)****
• Plenty of value remains in China, specifically further down the market-cap
• Government pivot should bolster the economy, while moves to focus on domestic players should aide performance of the trust
• The team has proven themselves adept at tapping into unlisted opportunities
• FCSS has grown its dividend every year since launch in 2011, compounding at over 30%. Increasing corporate focus from Chinese companies should see dividend focus grow from here.

Manager’s View

“I am positive. I think a lot of people forget a lot of Chinese companies are already paying 25% for Trump 1.0 when it comes to tariffs. Even if we go to 50%, it comes at a time when companies are getting stronger, and the rest of the world is now paying as well. From a relative basis, the companies just seem a lot more confident of their ability to deal with this. They are prepared – we just need that certainty of what the final outcome is.”

Dale says despite the upturn in fortunes for the Chinese economy in the past 12 months, there remain two issues which continue to hold it back. The first of these is tariffs – with Dale stating that markets need certainty to push forwards. However, he says that not only is the Chinese government prepared for tariffs – with only 3% of the MSCI China’s revenues being down to US exposure – but a recent meeting between Donald Trump and Xi Jinping does offer confidence that a full deal can be made – which would be a positive for companies, consumers and markets.

Dale says the narrative coming out of both countries is that there will be no de-coupling as their economies are intertwined – adding that China is starting to show more confidence as it recognises its leverage – adding that the world’s second largest economy is a leader in areas where it is hard to replicate, such as industrials, consumer staples and healthcare.

The other catalyst he is confident in, moving forward, is earnings – adding that, with the exception of the technology, most other sectors have had consistent earnings downgrades in recent times. However, he says there are signs of that turning.

Even within technology, Dale feels investment in AI in China is about 18 months behind the United States, indicating the main driver to the US could easily feed through to China in the not too distant future.

“The turn in earnings is very important. The big drag has been on consumption – so we have seen weak consumption and consumer confidence and this is tied to two things – perceptions around income and perceptions around assets. Property (assets) has been a mixed picture. First tier cities’ primary pricing has been up in as many months as it has been down recently; that for me is still slowly getting better on a year-on-year basis, but is still an area of focus where more has to be done,” he says.

He believes we are still in the bottoming phase for the property sector and, while we cannot expect a return to the exceptionally strong markets seen before, there is some good potential pricing at the bottom, given government action as well supply and demand dynamics.

On the income side, Dale says improved earnings for companies will see increased pressure to pay more of that towards employees. The consumer balance sheet is already in good shape with the Chinese consumer unwilling to spend post-Covid with households nearly doubling their savings and halving their borrowing.

“Debt is down on balance sheets, so this all comes back to confidence,” Dale says.

Valuation opportunity still very strong

Fidelity China Special Situations has always had a strong focus on small to mid-cap, which has been a drag recently on performance. That is not a surprise because a recovery normally starts with the larger caps. The big names, like Tencent and Alibaba, have all done well, but there is potential for some of the smaller caps to catch up.

In addition to the property, industrial and the consumer sectors, Dale also highlights healthcare – where a tough anti-corruption campaign has hit hard in the past couple of years. Despite this, he says China continues to take their share in terms of global pipelines with global pharmaceutical companies looking to do licensing deals because they are aware new innovation will continue.

Portfolio positioning

Rotating the winners

With a share price total return of 61% in the past 12 months, Dale has taken the opportunity to take profits from a number of his holdings and recycle into other areas where he is finding more compelling valuation opportunities. Financials is one area where he has lowered exposure, with the likes of insurers and consumer financial stocks being cut back.

Dale cites a quartet of areas he has targeted. The first, and biggest of these, is industrials, where Dale says exposure is broad, pointing to the wider market still understating the competitive nature of a number of Chinese industrial companies.

He says: “Industrial companies in China have compounded research and development spend at over 20% for around 15 years, and we shouldn’t be surprised that they are more competitive. China has 60-70% global market share in electric vehicles – but its share of the global upstream supply chain, in areas like batteries, is higher. Batteries are hugely important technologies, and I just don’t see how anyone is going to be able to compete. CATL is the biggest player in the space – it has got 20,000 engineers and spends $2-3bn a year on research and development. It is hard to catch that up.”

Although Dale is negative towards electric vehicles as an industry – due to growing competition – he says the supply chain for the market is attractive. He cites Hesai advancing next-generation mobility through intelligent sensing.

He says: “Hesai is the world’s biggest LiDAR manufacturer (light detection and ranging) sensor technology. The shift towards semi-autonomous is happening faster in China – driver assistance for example. As a result penetration of categories like LiDAR is well ahead of the Western World.

“We are just on the cusp of growth in autonomous and what is interesting about LiDAR is it will go beyond autos. It is penetrating areas like autonomous lawnmowers and robotics.”

The consumer also offers significant opportunities should confidence return, with names like Xtep International, a leading running business with the biggest share of marathon runners, and Chicmax, which sells a number of brands under its banner. 

Sector opportunities and unlisted upside

Healthcare and biotech research represents another area of particular strength, where China Hutchmed and Innovent Biologics serve as good examples of China’s growing strength in biotech, combining advanced biologics manufacturing with innovative drug development.

Property also offers value – Dale tends to prefer private companies, but here is where we are seeing a greater number of state-owned names in the sector. He says consolidation is taking place at speed, meaning the winners are taking market share rapidly.

He says: “There is also an anomaly in terms of how companies are priced. Some companies are good investment businesses and successful chains. The market is combining the multiples for development versus investment which are very different business lines. The offshoot is they are not properly valuing the investment businesses of companies, which will also benefit with some element of consumption recovery. There is also the growth of the REIT market – which is a good potential capital recycling vehicle for property companies. They are out of favour, but we do not mind that.”

A-shares and unlisted companies

Dale says the relative value for A-shares is looking better should we see a broader recovery, meanwhile he has been very active in the unlisted market, where they have had some exits (companies being listed). He says ByteDance (the owner of TikTok) is his biggest active bet in the portfolio, having increased exposure in the secondary market over a year ago.

He says: “It (unlisted) is a great market for understood opportunities, and we increased our exposure to ByteDance at a single digit multiple, despite the international business (TikTok) losing money. I still think there is huge value there, people will be concerned about the US issues with ByteDance– but it sounds like there is a deal there. I would also add that the US exposure gets overstated, there are 170 million users, which is not insignificant, but globally they have over two billion.”

Portfolio contributors

Dale says what has been most pleasing for the trust has been that performance has been largely driven by security selection. Consumer discretionary was the biggest sector contributor in the past 12 months, with Hesai topping the list. Others include LexinFintech a consumer finance company which was acquired at a low valuation, as well as Precision Tsugami, which makes lathes, which are versatile machine tools used to shape materials like metal, wood and plastic, by rotating the workpiece against a cutting tool. They have been big beneficiaries from EV growth and are also moving into robotics.

The biggest detractor has been Xiaomi, with Dale choosing not to hold the technology giant. He says: “Their execution has been excellent and people have got excited about their market share gained in the auto space. My only trouble is it is hard to get high margins in EVs. So, for a company approaching 30x earnings, the risk reward is not there for me.”

He also has an underweight position in Alibaba – which has dragged on performance in the past 12 months.

What else do investors need to know?

Fidelity China Special Situations changed its approach to gearing relatively recently, with the board using CFDs (contracts for difference). Dale looks at gearing on a net basis and tries to keep it below 120% – he says it recently crept up due to a number of factors, citing an investment in the crypto space as well as the fundamental improvement in the large-cap story.

“We reduced some of the underweights in Alibaba and Baidu, because that catch-up process with some of the US names has started with Chinese technology firms. There is a recognition that cloud growth is going to match, if not beat, the US from this low base. That is starting to get priced in.”

FCSS has traded on a discount in the past five years. It currently stands at -9.8%, ahead of its five year average of -7.6%****. The board do use share buybacks to support the dividends, having purchased some 31 million in the past financial year.

FCSS has grown its dividend every year since launch in 2011, compounding at over 30%. Increasing corporate focus from Chinese companies should see dividend growth from here.

The Board agreed a revised fee with the Manager, FIL Investment Services (UK) Limited, with effect from 1 July 2023. The revised fee will be 0.85% (reduced from 0.90%) on the first £1.5bn of net assets. It will remain at 0.65% on net assets over £1.5bn. The trust does have a performance fee of +/- 0.20% based on the NAV per share performance relative to its benchmark.

Outlook

Dale’s message is that although there will be more volatility, the Chinese economy will continue to grow and that will create opportunities. He says sentiment is slowly changing, with increased competitiveness in the likes of industrials and technology.

“The DeepSeek moment helped with this change in sentiment in technology, but it is starting to become much broader,” he says.

He believes there are opportunities across the spectrum. The outlook for Chinese tech businesses has improved, but they remain cheap versus their US peers; while other sectors still look incredibly attractive. Further down the market-cap spectrum there remain significant opportunities – particularly with the government’s focus on domestic players, while Dale is particularly excited about the unlisted element of the portfolio – which can take longer to come through.

Despite the recovery, valuations in China still look incredibly attractive. The 12 month forward price-to-earnings for the MSCI China is at roughly a 40% discount to the S&P 500^. Dale has proven that he can take advantage when these opportunities occur and those willing to back him have been handsomely rewarded in the past.

*Source: FE Analytics, total returns in pounds sterling, 14 November 2024 to 14 November 2025

**Source: AIC, at 14 November 2025

***Source: FE Analytics, total returns in pounds sterling, 13 November 2015 to 14 November 2025

****Source: FE fundinfo, 13 November 2025

^Source: Fidelity International, 30 September 2025